Growing Money with Compound Interest NoFrills Money Skills Video Series Episode 1 httpswwwyoutubecomwatchvaqu8pALMtOs Interest Terms to Know Interest rate the price paid for using someone elses money expressed as a percentage of the amount borrowed ID: 1027417
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1. What is Compound Interest?
2. Growing Money with Compound InterestNo-Frills Money Skills Video Series, Episode 1https://www.youtube.com/watch?v=aqu8pALMtOs
3. Interest Terms to KnowInterest rate: the price paid for using someone else’s money, expressed as a percentage of the amount borrowed. Compound interest: interest earned on both the principal and any interest that has been earned previously.Earned on accounts at banks, credit unions, etc.Earned on certain investments such as annuitiesPaid on most consumer loans, car loans, mortgages, and other unpaid credit balancesSimple interest: interest earned only on the principal.May be used on some consumer loans and some types of savingsEasier to calculate but not as commonly used
4. Time Matters with InterestInterest can be compounded over different lengths of time including: Annually – computed and added at the end of each year Semi-annually – (twice a year) computed and added every six monthsQuarterly – (four times a year) computed and added at the end of each quarter (three months) Monthly – computed and added at the end of each month
5. Calculating Simple and Compound Interest
6. Simple Interest ExampleDianna deposits $725 into a savings account that pays 2.3% simple annual interest. How much interest will Dianna earn after 18 months?
7. Simple Interest EquationTo calculate simple interest we use the formula I = Pxr xt I is the interest earnedP is the principal or the original amount of money with which you startr is the annual interest rate as a decimalt is the time in years.
8. Solution for DiannaThe annual interest rate is written as a decimal. (2.3 = .0023)In the simple interest formula, time is measured in years. (18 months = 1.5 years)I = Pxr xtInterest earned = $725 x .0023 x 1.5
9. Two Problems to SolveDetermine the amount of interest earned.Use the formula for simple interest.Problem 1Principal: $550Annual rate: 7%Time: 4 years Problem 2Principal: $870Annual rate: 3.7%Time: 30 months
10. Compound Interest EquationUse this formula to calculate compound interest: A=P(1+r) tA is the amount of money in the account at the end of a time periodP is the principalr is the annual interest ratet is the time in years
11. Compound Interest ExampleSimon deposits $400 in an account that pays 3% interest compounded annually. What is the balance of Simon’s account at the end of 2 years?
12. Calculating Simon’s InterestStep 1. Find the balance at the end of the first year using the simple interest formula I = Pxr xt$400 x .003 x 1 = $12$400 + $12 = $412Step 2. Find the interest at the end of the second year using the simple interest formula and the principal of $412. $412 x .003 x 1 = $12.36$412 + $12.36 = $424.36
13. Calculating Jackie’s EarningsJackie deposits $325 in an account that pays 4.1% interest compounded annually. How much money will Jackie have in her account after 3 years?
14. Calculating Long-term SavingsUse the following compound interest calculator to determine the amount earned by age 65, starting at two different ages.Start saving $50 a month at age 18 at 4% interestStart saving $50 a month at age 30 at 4% interesthttps://econedlink.org/resources/compound-interest-calculator/